Final Agency Determination: FAD-222

Subject: Final Agency Determination for the 2012 crop year regarding the interpretation of section 3(h)(3) of the Common Crop Insurance Policy Basic Provisions (Basic Provisions), published at 7 C.F.R. § 457.8. This request is pursuant to 7 C.F.R. part 400, subpart X.

Background:

Section 3(h)(3) of the Basic Provisions states, in relevant part:

3. Insurance Guarantees, Coverage Levels, and Prices.

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(h) In addition to any consequences in section 3(g), at any time the circumstances described below are discovered, your approved yield will be adjusted:

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(3) To an amount consistent with the production methods actually carried out for the crop year if you use a different production method than was previously used and the production method actually carried out is likely to result in a yield lower than the average of your previous actual yields. The yield will be adjusted based on your other units where such production methods were carried out or to the applicable county transitional yield for the production methods if other such units do not exist. You must notify us of changes in your production methods by the acreage reporting date. If you fail to notify us, in addition to the reduction of your approved yield described herein, you will be considered to have misreported information and you will be subject to the consequences in section 6(g). For example, for a non-irrigated unit, your yield is based upon acreage of the crop that is watered once prior to planting, and the crop is not watered prior to planting for the current crop year. Your approved APH yield will be reduced to an amount consistent with the actual production history of your other non-irrigated units where the crop has not been watered prior to planting or limited to the non-irrigated transitional yield for the unit if other such units do not exist.

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Other Relevant Regulations

Section 12(d) of the Basic Provisions states, in relevant part:

12. Causes of Loss

Insurance is provided only to protect against unavoidable, naturally occurring events. A list of the covered naturally occurring events is contained in the applicable Crop Provisions. All other causes of loss, including but not limited to the following, are NOT covered:

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(d) Failure or breakdown of the irrigation equipment or facilities, or the inability to prepare the land for irrigation using your established irrigation method (e.g., furrow irrigation), unless the failure, breakdown or inability is due to a cause of loss specified in the Crop Provisions.

(1) You must make all reasonable efforts to restore the equipment or facilities to proper working order within a reasonable amount of time unless we determine it is not practical to do so.

(2) Cost will not be considered when determining whether it is practical to restore the equipment or facilities;

Interpretation Submitted

The requester interprets section 3(h)(3) of the Basic Provisions to require the AIP to adjust a policyholder’s approved yield in a crop year for any acreage on which the policyholder produces a crop and the following conditions are met:

(a) the policyholder does not use a production method in that crop year that had been used in prior years to produce the actual yields contained in the policyholder’s production history database (which prior yields would typically be averaged to calculate the approved yield for that acreage if the production methods had not changed); and

(b) the production methods actually utilized on that acreage in the crop year will likely result in a yield lower than the average of the policyholder’s previous actual yields.

The AIP must adjust the approved yield when those conditions are met, regardless of the reason why the policyholder did not use the historical production method that year.

The 2011 Crop Insurance Handbook requires in Paragraph 18 E (2) that the AIP must adjust the approved yield “when a lower yielding production method than was reported to calculate the approved APH yield is carried out.” That handbook also requires in Paragraph 18 E (1)(b) that “such reductions must be made anytime the circumstances requiring them are discovered.”

Section 3(h)(3) of the 2011 Basic Provisions provides an analogous example to illustrate this requirement:

For example, for a non-irrigated unit, your yield is based upon acreage of the crop that is watered once prior to planting, and the crop is not watered prior to planting for the current crop year. Your approved APH yield will be reduced to an amount consistent with the actual production history of your other non-irrigated units where the crop has not been watered prior to planting or limited to the non-irrigated transitional yield for the unit if other such units do not exist.

Therefore, using the example described in section 3(h)(3) quoted above, if a policyholder had in prior years used irrigation pivots to provide supplemental water during the growing season to acreage that was insured as non-irrigated, and then fails to provide supplemental water in a crop year because of a breakdown in irrigation equipment not covered by the policy, the AIP must revise the approved APH yield to be consistent with the production method actually carried out that crop year, and then recalculate the guarantee accordingly before adjusting the loss. The AIP must revise the APH when the breakdown is caused by simple mechanical failure.

Also, there is no exception to the approved yield adjustment rule in section 3 (h) (3) for circumstances where the policyholder changes to a lower-yielding production method due to what might otherwise be a covered cause of loss. For example, when a crop is insured as non-irrigated for the current year, whether a breakdown of irrigation equipment might be a covered cause of loss under the narrow exception contained in section 12(d) of the Basic Provisions has no bearing on which approved yield applies when a farmer had historically applied supplemental water and then did not in the current crop year. Where the breakdown is caused by an event that damages the irrigation equipment or facilities, but not the crops, even if the event would be an insured cause of loss if it had directly damaged the covered crops, the AIP must still revise the approved APH yield in accordance with the production method actually used before determining the amount of the claim.

Final Agency Determination

The Federal Crop Insurance Corporation (FCIC) agrees in part with the requestors’ interpretations of Section 3(h)(3) of the Basic Provisions. If the producer changes production practices such that the crop is expected to yield lower than under the production practices used to establish the approved yield, the approved yield must be adjusted to reflect the lower yield potential. This means that if the producer insured the crop as a non-irrigated practice when the approved yield is based on an irrigated practice, the approved yield must be adjusted. However, if the reason the producer is changing the production practices is because the irrigation equipment was damaged by an insurable cause of loss and it is determined that it is not practical to repair it, then the approved yield is not adjusted and any resulting damage to the crop is a covered cause of loss and indemnified under the policy. To interpret the policy in any other manner would effectively render the provisions in section 12(d) of the Basic Provisions that allowed coverage for breakdown in the irrigation equipment or facilities if caused by a covered cause of loss meaningless.

In accordance with 7 C.F.R. § 400.765(c), this Final Agency Determination is binding on all participants in the Federal crop insurance program for the crop years the policy provisions are in effect. Any appeal of this decision must be in accordance with 7 C.F.R. § 400.768(g).

Date of Issue: July 24, 2014